Canada’s Bank Regulator Targets “Operational Risk” in 2013

Canada’s top financial watchdog intends to press the big banks next year on how well prepared they are to deal with so-called “operational risk”–one of the most difficult risks to protect against.

“We think it’s becoming a much bigger risk, and it’s related to the fact that banks everywhere are in a cost-cutting mode, so they’re trying to do more with less, and that does increase risk,” Julie Dickson, the head of the Office of the Superintendent of Financial Institutions, told Canada Real Time in an interview earlier in December.

Operational risk is broadly defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. It covers the risk of cyber attacks, money laundering, business continuity, and catastrophic events. But it also includes the adequacy of back office systems, data integrity and the ability of banks to aggregate their global data to determine such things as their global exposures.

“It’s very much a risk that’s come front and center,” said Ms. Dickson. “As a bank, you have to be able to continue to operate and interface with your customers, and capital doesn’t save you.”

The problem is most of the world’s financial institutions don’t have the back-office systems to pull together and aggregate risk data, she said.

The Financial Stability Board, which Bank of Canada Governor Mark Carney chairs, formally asked the Basel Committee on Banking Supervision, to put operational risk on its 2013-14 agenda. The FSB wants global systemically important banks to have their systems well enough developed by 2016 to grab aggregated data quickly on large trading partners, Ms. Dickson said.

OSFI has been front-running most other regulators in implementing tough new global rules. So, banks here–ranked the world’s safest for the past five straight years by the Geneva-based World Economic Forum–can pretty much expect that they’d better show they’re already prepared, or are close to having systems in place, before OSFI comes calling.

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Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com